March 16, 2016

The Foggy Fraud Problem Hidden within the Music Streaming Business Model

The good news is that Apple Music's subscriptions had topped ten million by the end of 2015. Apple is catching the next music wave that's showing that demand for streaming music has increased more than fifty percent in the last year alone, with 164 billion songs streamed. The bad news is that a growing number of song streams within that total may not be legitimate and that could spell bad news for this budding business segment if they can't get the problem under control.

There's a fascinating report that's out today that talks about the dirty little secret in the streaming music business. According to the report, Spotify, Tidal and Rhapsody are all battling multi-million lawsuits alleging copyright issues and improper royalty payments. Yet running underground to all of that noise if the issue of 'Click Fraud.'

Click fraud is basically the use of automated digital bots to 'click' on payment-generating links and steal money by pretending to be consumers, has long been a problem in the online advertising industry. Websites stand to lose as much as $7.2 billion from fraudulent traffic in 2016, according to a study this January from the Association of National Advertisers.

This growing problem is now extending to steaming music industry, amid a rapid transition to online streaming services as the primary mode of distributing music and source of royalty payments. In the US alone, the streaming industry is projected to reach roughly $2 billion by 2019. The ascent of services like Spotify, Apple Music, Deezer, and Tidal—along with their per-stream payment models—has created an alluring target for fraudsters who need only a few auto-generated dance tunes and a modicum of coding expertise to fashion bots that basically snatch money out of thin air.

The Flaw in the Big Pool

Streaming music services from Apple and Spotify calculate royalties for artists by putting all of the subscription revenue in one big pool. The services then take out 30% for themselves. The remaining 70% is set aside for royalties.

This giant bag of royalties is then divided by the overall number of streams (aka "plays" or "listens"). The result is called the "per-stream royalty rate".

The problem lies in the fact that this "Big Pool method" only cares about one thing and one thing only: the overall number of streams. It doesn't care less about how many subscribers generated those streams.

As music streaming is going to equal or surpass music downloads by 2019, the music streaming calculating machine better be able to eliminate the click fraud or the artists will experience a worsening death spiral for royalty payments. Imaginary music streams will produce imaginary royalties.

What's most alarming, experts say, is the industry's refusal to acknowledge the size of the issue. 'It's something that will probably increase. Whether that results in thousands of misappropriated dollars or millions, I don't know,' John Seay, an entertainment lawyer who specializes in copyright and streaming. Click fraud is a new development in an ongoing narrative of hustlers trying to get money they're not entitled to.'

While click fraud may not be as high a priority as growing subscribers or fighting lawsuits, streaming services would do well to cut the problem off before it escalates—as it has in the internet at large.

And if services are really serious about catering more to musicians' needs, there's no better way to prove that dedication than tackling something that saps such artists' already-paltry profits. All in all, the time to act is now."

To learn more about 'click fraud' read the full Quartz report here that contains links to other sources that details the problem even further. At present, Apple hasn't publicly commented on any measures that they may have in place to monitor and/or eliminate click fraud within Apple Music.

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